Kotak Mahindra Bank Ltd’s share price rose 5.23% on a day when the BSE Bankex fell 1.2%. The fact that it has a relatively lower proportion of savings bank accounts might have helped. For that means the bank won’t be affected much by savings bank account deregulation. But then the bank also reported a 19% rise in consolidated net profit from a year ago to Rs 433 crore.
That said, like in the past few quarters, the bank is increasingly dependent on its loan book to spur growth. Like in the June quarter, the financing business made up 83% of profit before tax (PBT). Fee-based business, such as broking, investment banking, investment advisory, etc., showed a decline in PBT or made a loss. In fiscal 2010, the loan business made up 59% of PBT, while the same accounted for 75% in fiscal 2011.
Kotak Securities Ltd lost market share in the September quarter compared with a year ago, while the investment banking business reported a loss. The insurance business showed an improvement in profit, but premium income continued to decline.
On the positive side, despite rising interest rates, loans rose 35% from a year ago, leaving the system’s growth rate far behind. However, the more profitable retail loans (including that of Kotak Mahindra Prime Ltd) grew some 25% from a year ago, while corporate loans grew at a breakneck 58%.
While that, along with rising rates, meant that Kotak’s net interest margins were squeezed, it also ensured that asset quality improved.
The key question for investors is if Kotak will be able to sustain this pace of loan growth. Even if the loan book continues to grow, net interest margins might be under pressure. Secondly, the bank is trading at 2.9 times its estimated book value for fiscal 2012; only HDFC Bank Ltd has a higher valuation. That means upside will be limited.